A Ghost in the Lease

Usually, the lease governs the relationship between the Landlord and the Tenant, but, their are ghosts that sort of hover around the lease, haunting it if you will. Generally, ghosts are pretty harmless, but sometimes, things can go wrong and you find yourself getting stuck in Paranormal Activity 4 (Update, there are 6 Paranormal Activity Films).

Those ghosts, in Texas, are case law and the laws themselves. Take for example Section 92.008 of the Texas Property Code. Subsection (g) specifically says that the Landlord nor the Tenant can waive their rights or duties under this Section.

Another example of a ghost is the case Italian Cowboy Partners vs Prudential Insurance Company. There, the court found some disclaimer language to be insufficient in the lease which ended up hurting the Landlord. Basically, if you want to have protection in a lease as a Landlord, that protection had better be in very clear and unequivocal language.

So if you are not a fan of horror movies, hire an attorney who can help you with a lease, or any contract for that matter. Attorneys, believe it or not, make pretty good ghost busters.

If you have any questions or comments, send us an email through our contact page. Also, if you know anyone looking to buy, sell or lease in Dallas or the surrounding areas, CRECL does appreciate referrals.

Landlords, Transactional Costs Can Destroy Your Bottom Line

I am representing a client who wants to sign a five year lease in a retail center. The total economic value of the lease, including base rent, triple nets, and tenant improvement allowance is around $150,000.

We spent a good month negotiating the LOI. We agree to terms, and of course, the landlord's attorney sends over a 60 page monstrosity of a lease. This takes 6 weeks of back and forth to get this lease to an acceptable level of balance between the landlord and tenant for me to even tell my client the lease is now sign-able. I know how much I am charging and don't know how much the landlord's counsel is charging, but, let's assume that between the two attorneys, a modest $6,000 in legal fees have been spent to negotiate the deal. The transactional costs for legal fees is at a minimum, 4%.

Perhaps, if the lease was reasonable to begin with, the tenant would have been more willing to spend little more on rent and the Landlord wouldn't have had to pay as much in legal fees. I'm sure the Landlord would love to have someone sign the lease as is, because what landlord wouldn't, but that hope costs money. My practice tip for Landlords, have two leases, one that will quickly get the deal done if the other side is represented by legal counsel and the other, the long legal monstrosity of a lease, that dramatically favors the landlord.

It took 2 and a half months to negotiate this deal. This represents an opportunity cost in terms of only lost rents and triple nets of almost $7,500 or about 4% of total economic value of the deal.

In total, between legal fees and opportunity costs, the transactional cost to negotiate is at least 8% of the economic value of the contemplated lease. That's $12,000.

Yes, it would be impossible to get these costs down to zero, but imagine if you could cut them to just 3%. That's well within the realm of possibility. It would juice your returns by an extra 5% or about 1% a year.

Being able to net an extra 1% in nets on a 20 million dollar shopping center would add, assuming a cap rate of 8%, $175,000 to the value of your shopping center, your office building, or whatever kind of commercial real estate you have.  At a 7% and a 6% cap rate, that would add, respectively, $200,000 and $233,333. This is not chump change.

Remember Landlords, time costs money and attorney's cost money. Quickly negotiating LOIs, having a "fair and balanced" lease, and getting the tenant into the space faster will only help your bottom line.

I hope the discussion above has made it clear why it is worth your wild to have a professional advocate on your behalf. As both a commercial real estate attorney and real estate sales agent, I can make sure your interests are protected on both the economic and legal sides of a deal.

If you have any questions or comments, send me an email to bendalton@rebcl.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.

Severability Clauses in Commercial Leases

Severability clauses are boilerplate these days, especially in commercial leases. Below is an example of the standard clause...

The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

But subtle changes to boilerplate items can greatly benefit your client in the event of litigation. Consider a typical commercial lease which is often pro-landlord. Any term that gets struck out of a pro-landlord lease is more likely going to hurt the landlord and be of the benefit to the tenant.

So if you are representing a landlord, consider adding the following wording to make an even better severability clause...

To the extent possible, the invalid, illegal or unenforceable term shall be replaced by a term that is legal, valid and enforceable and that comes closest to expressing the intention of the illegal, invalid or unenforceable term.

Doesn't that already look better? Adding those words to standard boilerplate now does an even better job of protecting your client. And it can get even better...

If the application of this Severability provision should materially and adversely affect the economic substance of the transaction contemplated, then the Party adversely impacted shall be entitled to reasonable compensation for the adverse impact, provided the reason for the illegality, invalidity or unenforceability of the term is not due to misconduct by the Party seeking the compensation.

That additional wording to a frequent boilerplate provision does a significantly better job of protecting the landlord. Remember, just because it's boilerplate and has been used for years as boilerplate doesn't mean that it's the best choice.

I hope this demonstrates that every part of any lease must always be closely looked at depending on who you are representing. Even the boilerplate. With contracts, words, whether they are there or not, matter.

If you have any questions or comments, send me an email to bendalton@rebcl.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.